The seven-day switching service is the latest in a string of regulatory changes impacting on the UK retail banks. Since the demise of the voluntary Banking Code in 2009, the sector has experienced a deluge of new mandatory prudential and conduct of business requirements, writes Roger Davies
With PPI in the background, the biggest mis-selling scandal in history, many will feel this has been long overdue especially as it is not an isolated event. The selling of interest rate swaps is being reviewed back to 2001, LIBOR issues could yet snowball and concerns are now being raised over packaged accounts too. However while there is clearly a need for tighter regulatory control, there is also a real risk that the torrent of financial services regulation will swamp the industry and discourage new entrants.
Insiders will say that the UK banks, constrained by their branch network and legacy IT systems, have done well to keep pace with the vast array of new regulations. To this end they have been aided by European regulators deferring directive roll-out dates in the hope of delivering greater single-market harmonisation. The US Treasury is also delaying the key FATCA ‘withholding’ date from January to July 2014. However, all should be mindful that EU change programmes will in future be dominated by instant ‘Regulation’ rather than by a Directive with a 2-year lead in time.
In many ways, the latest reforms have had a negative effect. The high street banks have, for example, withdrawn their network investment advisers due to the UK’s Retail Distribution Review reforms. Bank CEOs are talking of retreating to core activities. Such a policy acknowledges that structural banking reform is underway (eg Vickers) but also recognises that compliance, essentially based on increased transparency and capital, is never cheap.
Not all new regulation can, of course, be avoided by market withdrawal and prudential reform heads the list in 2013. The deadline for the transposition of the Capital Requirements Directive-4 (CRD IV) looms on 31st December and consultations abound. CRD IV, via a Regulation and a Directive, transposes the new global standards on bank capital into the EU legal framework. In addition to these Basel III based reforms, this package also introduces many new provisions including those on remuneration and governance.
Beyond the Capital Requirements Directive, there is no shortage of other complicated regulation on the horizon. The new EMIR legislation, still with hazy timelines, impacts on all dealing with derivatives (eg fixed rate loans). UK investment banks and insurance arms are currently struggling with the Alternative Investment Fund Managers Directive and roll-out will continue for years to come.
All retail banks, having come to terms with the latest payments regulations (PSRs and EMRs), must comply with SEPA for their euro business with effect from February 2014. The latter has spawned projects looking to create a pan-European mobile payment mechanism. Innovation in the payments arena is dependent on a detailed understanding of the regulatory umbrella and all players are currently viewing the mobile channel as a future card replacement.
Changes are also afoot with consumer credit. In the UK, the Financial Conduct Authority (FCA) will assume the role of the Office of Fair Trading with effect from April 2014. Residential mortgages are also in the regulator’s sights with new requirements starting from the same date. A Mortgage Credit Directive is about to be finalised in Brussels too. Some replication looks inevitable. The FCA has already indicated that it will look at the second mortgage market next year and common standards should be anticipated. A market study into the UK cash savings market has also just been announced and the FCA will assess if competition is working in the best interests of consumers. Lobbying will be intense!
This frenzied activity, to the despair of many, shows no sign of easing up. Indeed, we should expect another burst in early 2014 as EU regulators rush to complete key legislation before the three month break leading up to the European Parliament elections. The priorities include MiFID-2 with multi-asset coverage and promises of far greater transparency. The new Market Abuse Directive-2 will be closely linked to the MiFID-2 timetable and expand its scope into the new classes of trading platforms and OTC trades. Although recently delayed, the new General Data Protection Regulation has widespread political support.
Banks will have to consider Data Protection objectives when designing new systems. Rapid progress is also expected with the Recovery and Resolution Directive promoting Living Wills and stress testing. The 4th Anti-Money Laundering Directive is also on the priority list. This Directive should expand the risk-based approach of its predecessors with an added focus on tax evasion. A new area on the global agenda for 2014 is shadow banking.
G20 inspired regulation will undoubtedly transform the UK banking sector but any vision of the future is clouded by uncertainty. Extraterritoriality issues, led by Dodd-Frank legislation, threaten further complication. There is a desperate need for co-ordinated global regulation with common standards to avoid duplication and arbitrage. Fines from the UK regulator are becoming more common-place inferring that the full implications of existing and new legislation are not being recognised by strategists, project teams and their legal advisers.
It is acknowledged that the effectiveness of change programmes has not been helped by the organisational structures of banks and the European rule makers as they promote silo mentalities and wasteful replication. With consumer trust a key issue, banks and regulators simply must do better. Ultimately, identifying and achieving competitive advantage in the highly regulated markets of tomorrow will decide the winners and losers.
Roger Davies is Principal Consultant at ea Consulting Group